Friday, October 18, 2013 - Biscuits on the Dark Side of the Moon

Biscuits on the Dark Side of the Moon

by Sinclair Noe

DOW + 28 = 15,399
SPX + 11 = 1744
NAS + 51 = 3914
10 YR YLD un = 2.59%
OIL + .28 = 101.15
GOLD – 2.70 = 1318.40
SILV + .07 = 22.06

There will be a lunar eclipse a little later this hour. In the West we won't see it, but you can phone your friends in the East. Maybe it explains something.

The S&P 500 index hit another all time record close.

Tobias Levkovich is the chief US equity strategist for Citigroup, and he may have had the best analysis of post-deal state of the markets: “Kicking the proverbial can down the street does not address the long-term fiscal imbalances. The twin decisions of a taper timing push out and the discord in Washington being swept under the rug until January and February roll in could keep P/E multiples more compressed as equity risk premiums stay elevated. Investors typically do not like uncertainty and it is hard to determine how these recent almost non-decisions can be seen as reinvigorating confidence aside from some relief that an imminent likely disaster has been avoided. Nonetheless, one cannot respectably believe that things truly have turned for the better as opposed to averting the worst. The long-term growth of non-discretionary government spending can still prove to be an overwhelming liability and it has not been the primary focus for legislators.”

Larry Summers will not be the next Federal Reserve Chairman, and maybe that gives him a little more time to reflect. In an interview with Charlie Rose, Summers addressed the core problem with the recent and upcoming budget battles: “ I don't know why the obsession should be with entitlements, like the test of a country is did we scale back entitlements? No, the test of the country is did we have a stronger economy for our children than we had for ourselves. That's what is in doubt and that's what we should be focusing on.”

The Iowa Electronic Markets is the only sportsbook in America allowed to bet on US elections. Next year’s midterm elections for Congress are now a tossup between the Republicans and the Democrats. Of course the odds will change over the next year. The attention span of the average voter is …, I'm sorry, what was that?

A Time magazine article published today suggests that Texas Senator Ted Cruz, leader of the conservative effort to tie a curtailment of Obamacare to funding the government, is coming under scrutiny for failing to disclose ties to a Caribbean-based private equity fund; a possible violation of ethics rules. Cruz told Time that the omission was inadvertent and that he is in the process of making corrections to his Senate financial disclosure form.

The government shutdown started on October 1^st; since then the top performing asset classes have been equities, specifically the stock markets in Japan, Spain, the US, and Italy. And of course, Google, which has now become an asset class all its own.

Google joined the $1,000 per share club today, following a better than expected earnings report last night. Google went public in 2004 at $85 a share. Google reported earnings of $10.74 per share, well ahead of consensus estimates of $10.34.

In other earnings news, both General Electric and Morgan Stanley topped Wall Street expectations for the third quarter. GE shares gained 3.6% and Morgan Stanley rose 2.6%.

Home price gains are slowing after a strong bounce off the bottom, potentially marking a new phase for the housing recovery. According to a report from Zillow, home values aren't rising as fast as they were and even dipped in a few hot markets in September. More homes are coming on the market, and Realtors report less competition among buyers.

A new report from PriceCoopersWaterhouse says funding for US startups rose in the third quarter from year-ago levels, as venture capitalists poured money into a growing number of fledging software companies. Total investments in startups rose 17% to $7.7 billion from $6.6 billion in the July-September quarter of 2012. The number of deals rose 7% to 1,005 from 937. The software industry pulled down the largest chunk of funding, nearly $3.6 billion.

The dollar fell to eight-and-a-half-month lows against the euro; down around 1 percent on the week. The Chinese economy grew at an annual rate of 7.8% in the third quarter, accelerating from the second quarter's 7.5% increase.

The 11th-hour agreement to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on Treasury bonds that had threatened the global financial system, and exposed the vulnerabilities of the economic revival plans of other countries, especially Japan and China. Perhaps no two economies outside the United States have more at stake in Washington's recurring drama than Japan and China. Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation. Both nations have adopted policies to revitalize their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the US.

There are no bond markets large enough to give China and Japan an alternative to U.S. Treasuries for the dollars they accumulate selling exports. So the prospect of another U.S. default drama next year is likely to lend new urgency to China's preferred solution: conducting less trade in dollars and more in renminbi.

Very Serious People are warning that China might lose confidence in America and start dumping our bonds. That might not be such a bad thing. China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up. China could, possibly, depress the value of the dollar. But that would be good for America; a boon for American exporters.

And a US default would be very bad indeed for Japan, which is attempting to revive domestic consumption and investment, in part, by weakening the yen as part of the policy known as Abenomics. A US default would likely prompt investors to buy yen.

Bottom line is that there will be more talk about an alternative to the dollar as a reserve currency, but there is no place to run. At least not at this time.

The Murdoch Street Journal reports JPMorgan Chase has reached a tentative $4 billion deal with the Federal Housing Finance Agency to settle claims that the bank misled government-sponsored mortgage agencies about the quality of mortgages it sold to them during the housing boom. The deal is for less than the $6 billion the agency initially sought.

HSBC Group just lost, again; this time a $2.46 billion judgment in a long-running securities fraud lawsuit. The shareholder lawsuit alleged that Household International, now known as the HSBC Finance Corporation, misled investors about its lending practices, the quality of its loans and its accounting between 1999 and 2002. The lawsuit has wound its way through United States courts for 11 years and has been regularly noted in HSBC’s corporate filings. A federal jury in 2009 in Chicago found partially in favor of the shareholders, but HSBC and the other defendants have repeatedly challenged that verdict. Yesterday, the $2.46 billion dollar decision was announced in Federal District Court in Chicago. HSBC says it will appeal.

How much does a hamburger on the Dollar Menu cost?

Wrong, it costs much more. The fast-food industry costs US taxpayers about $7 billion a year, according to a report released this week. Researchers at the University of California at Berkeley and the University of Illinois said this subsidy comes about because 52% of fast-food workers are paid so poorly that they must rely on public assistance programs such as Medicaid and earned income tax credits. The fast food industry earns profits, pays dividends to shareholders, and pretty good wages to CEO's, but they stick the low wage costs on taxpayers, whether you eat their food or not.

Taco Bell and McDonald's are welfare queens. There is no free lunch. There is not even, really, a Dollar Menu.

 In 1965, CEOs at big companies earned, on average, about twenty times as much as their typical employee. These days, CEOs earn about two hundred and seventy times as much. That huge gap between the top and the middle is the result of a boom in executive compensation, which rose eight hundred and seventy-six per cent between 1978 and 2011. Last month, the SEC unveiled a rule to require companies to disclose the ratio of the CEOs pay to that of the median worker. The drive for transparency has actually helped fuel the spiralling salaries. For one thing, it gives executives a good idea of how much they can get away with asking for. The idea behind transparency is that full disclosure would embarrass companies enough to restrain executive pay, but the reality is that people who can ask to be paid a hundred million dollars are beyond embarrassment. A more crucial reason, though, has to do with the way boards of directors set salaries.

Boards tend to be comprised of members from peer companies that are bigger and tend to pay their own CEOs more. Also, boards tend to look at the CEO salaries of peer group firms and then peg their CEO's pay to the fiftieth, or seventy-fifth, or ninetieth percentile of the peer group; never lower. With all the companies following the same protocol, salaries ratchet higher, regardless of performance. It's known as the Lake Wobegone effect, where all the CEOs are above average.

Today's program has been brought to you in part by Powdermilk Biscuits. Heavens they're tasty and expeditious.